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A utility-based comparison of some models of exchange rate volatility

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  • West, Kenneth D.
  • Edison, Hali J.
  • Cho, Dongchul

Abstract

When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonpararnetric models for the conditional variance of each exchange rate, GARCI-J models tend to produce the highest utility, on average. A mean squared error criterion also favors GARCH, but not as sharply.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 35 (1993)
Issue (Month): 1-2 (August)
Pages: 23-45

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Handle: RePEc:eee:inecon:v:35:y:1993:i:1-2:p:23-45

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Meese, Richard A & Rose, Andrew K, 1991. "An Empirical Assessment of Non-linearities in Models of Exchange Rate Determination," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 603-19, May.
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  9. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-53, December.
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  11. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Time-Varying Risk Perceptions and the Pricing of Risky Assets," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 566-98, October.
  12. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  13. Meltzer, Allan H., 1989. "IMF policy advice, market volatility, commodity price rules, and other essays," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 31(1), pages 1-6, January.
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